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Will a personal loan reduce my credit score?

When you take out a loan, it’s likely you’ll have an initial dint in your score. This is because all applications are counted as ‘hard searches’. However, this drop should be temporary. As long as you’re making your repayments on time each month, your score will increase again over time.

Read on to see how taking out a personal loan impacts your credit score.

3 min read
Will a personal loan reduce my credit score?

1. Comparing quotes

Shopping around for the best deal on your personal loan is a smart idea but you might think comparing deals will affect your credit score.

Thankfully, just getting a quote from a lender won’t leave a mark on your credit file nor affect your score as long as it’s a soft search.

Be careful, as some lenders may do what is called a hard search on your credit history, even when just offering a quote. Make sure you look out on the lender’s or comparison site for a sign that getting a quote won’t affect your credit score - this will usually be mentioned before you get a quote or on the homepage.

2. Applying

For every application you make the lender will run a hard search and this will then leave a mark on your credit file. If you have multiple applications in a short space of time, this can really leave a negative impact and therefore hurt your chances of getting a loan in the future.

This is why it’s best to use eligibility checkers while shopping around to limit your applications, then you can just apply for one that is likely to approve you.

3. Missing a payment

Making a late payment or missing a payment altogether will have a negative impact on your credit score as it indicates that you aren’t a responsible borrower.

If there’s a change in your circumstances and you think you’re going to struggle to make a payment, it’s best to speak to your lender as soon as possible to discuss any options that may be available (such as payment breaks or lower repayments over a longer term). Lenders aren’t obligated to offer these, but they will want to help you get back on track.

4. Consolidating your debts

Consolidating your credit card debts into a debt consolidation loan will turn what is known as a revolving credit into instalment credit. This can have a positive impact on your credit score.

The reason for this is that revolving credit impacts your credit utilisation ratio whereas an instalment loan like a personal loan doesn’t. Your credit utilisation ratio is the percentage of your available credit that you’re actually using - or that you owe. Experts suggest the ideal credit utilisation ratio to be between 20%-30%.

5. Repaying the personal loan in full

On top of maintaining this repayment history once you have repaid your loan in full it will also create a positive impact on your credit score.

Having credit history, especially if you’re able to make it all positive, will increase your credit score and help you when you are seeking funds in the future. Start building your history by applying online for a personal loan.

If you find yourself being rejected for multiple applications because you have a poor financial history, opt for a bad credit loan instead.

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Intelligent Lending Ltd is a credit broker working with a panel of lenders.